David Cameron has been accused of "economic insanity" in trying to put a gun to the head of his European partners after he warned on Sunday that he would block treaty changes to make the euro more effective unless he is allowed to repatriate powers to the UK.

Cameron made his thinly veiled threat on the BBC's Andrew Marr Show, when he said he was "entitled" and "enabled" to seek a repatriation of powers when other EU countries sought treaty change to make the single currency work more effectively. Cameron is due to set out his definitive position on Europe, including a referendum, later this month.

Writing in the Guardian, the former European commissioner Lord Mandelson warns Cameron that he "will be disappointed if he thinks he can put a gun to their heads to begin renegotiating Britain's EU membership and then dictate when it will end, especially when, in their view, he is arguing not in Europe's interests as a whole but for British exceptionalism".

Faced by a choice between protecting the euro and British demands, he says Europe will choose the euro.

Claiming the Tory party is now gripped by a madness on Europe, he says it is "an act of economic insanity to begin 2013 by placing this large and indefinite question mark over our membership of the EU, and all the trade and investment privileges it brings us.

"The signal it sends to the world is that we are on our way out of the European single market and that those who invest in Britain in order to trade in that market should think again."

His remarks are supplemented by a warning from the shadow foreign secretary, Douglas Alexander, that Cameron is in danger of putting a long-term question mark over the UK's relations with its largest trading partner at a time when the country is desperate to secure growth.

Alexander writes: "Announcing an in/out referendum halfway through this parliament to take place more than halfway through the next, given the Conservatives' hostility towards Europe, could risk up to seven years of economic uncertainty, threatening vital investment and effectively playing roulette with the country's economic future."

Alexander added "Focusing on an in/out referendum now actually risks the UK missing the best chance in a generation to reform Europe so that it better serves our interests and meets our expectations.

"Simply presenting a shopping list of repatriations – backed by the threat of exit – will not deliver for Britain and will undermine our ability to shape and lead the broader project of EU reform.

"While the Prime Minister is right to recognise that Europe, and our position within it, is changing, he is wrong to imply that these changes inevitably threaten our interests It is still unclear how these changes will affect Britain's relationship with the EU, or indeed the nature of our membership".

Cameron reiterated on Sunday that he does not favour the UK leaving the EU, arguing that countries outside the EU such as Norway are subject to its rules but have no influence over its policies.

Setting out how Britain would have a lever over the rest of the EU to demand repatriation of UK competences, Cameron said: "What's happening in Europe right now is massive change being driven by the existence of the euro. The countries of the euro, they have got to change to make their currency work. They need to integrate more … This is something they recognise they have to do. There isn't a single currency in the world that doesn't have a banking union and forms of a fiscal union." He added: "As they need to change, what that means is they are changing the nature of the organisation to which we belong. And thus we are perfectly entitled, and not just entitled but actually enabled because they need changes, to ask for some changes ourselves."

Britain can veto treaty changes to make the euro more effective, such as closer EU supervision of banks and deficits. These treaty changes require the unanimous support of all EU members, and euro members are likely to take a dim view of Britain threatening to block an effective euro as part of a bargain designed to allow Britain to opt out of other EU laws, especially laws designed to create social equality.

EU sources have also claimed there is no certainty that treaty changes will be required, and if they are, and Britain seeks to veto them, they could still be agreed between governments without the need to use EU institutions.

Cameron said he supported treaty changes in principle to make the euro more effective.

He said: "I'm very positive about the changes that they need to make, but I think it's a perfectly acceptable argument to say that as you need to make your changes, there are changes that Britain would like to make too. We want to be members of the European Union, particularly the single market, but there are changes we would like to make."

He insisted the rest of the EU would concede to Britain's as-yet-unspecified demands, saying: "I'm not a fatalist. People told me it was never possible to make changes to our relationship. I came in as prime minister, I've already managed to get us out of the bailout power that the last government opted us into."

Pressed to explain the kind of competences that Britain would seek to have repatriated, he said: "There are lots of things we would be better off out of … The working time directive in my view should never have been introduced in the first place, because it's actually affecting things like the way we run our hospitals rather than simply about business and trade and the single market."

He also repeated a warning by the home secretary, Theresa May, that he would like to make it more difficult for EU citizens to claim UK benefits if they are working in Britain, a change that might not need treaty reform.

He said: "One of the key reasons of being a member of the European Union are what are called the key freedoms: the movement of services, the movement of goods and the movement of people. Now, there are restrictions already on the movement of people if you have, for instance, an emergency. Should we look at arguments about should it be harder for people to come and live in Britain and claim benefits? Yes, frankly we should."

He defended the Foreign-Office-led review of competences between the EU and the UK due to be completed by 2015. "We've got a process under way, a proper process with the balance of competences review where the government – and the public can be as involved in this as they like – are going through competence after competence, area after area, and saying: 'What is the balanced argument? What's right at the European level? What's right at the national level?'"

Cameron refused to be drawn on the exact nature of any referendum he would offer, but reiterated there would be a "real choice" for Britons.

He argued against Britain leaving the EU, saying: "50% of our trade is with the European Union. At the moment, because we're in this single market, we have a seat at the table in the single market, we help write those rules. If we were outside the EU altogether, we would still be trading with these European countries but we would have no say."